Updated HMRC guidance on hybrid & other mismatches

Wed 20 Dec 2017

HMRC has issued updated guidance on the Hybrid & other mismatch rules (CTA 2010 part 6A) included in its International Manual.  Currently it is in the form of a separate pdf document  extending to 442 pages.

The rules are designed to counter arrangements giving rise to hybrid mismatch outcomes leading to a tax mismatch. This can involve double deductions for the same expense, or deductions for an expense without the corresponding receipt being fully taxed. In broad summary:

• The rules apply where there is either:
  • Deduction without corresponding income recognition (D/NI);
  • Deduction for the same expense more than once (DD).
• A mismatch can be caused by:
  • Hybrid entity (such as a US LLC treated as look through in one jurisdiction and opaque in another);
  • A hybrid instrument (these can be most types of financial instruments but where one party treats the arrangement as a lending of money and the other does not, but can also arise where different tax treatments apply in different jurisdictions);
  • Differential recognition of a permanent establishment between jurisdictions;
  • Dual residency;
  • A mismatch arising from any of the above outside the UK, which is imported into the UK through a supply chain.
• There is no requirement for any tax avoidance purpose (a contrast with previous rules that targeted this area).
• The rules apply mechanically and so some circumstances may be caught unexpectedly.
• Counteraction (if there is no counteraction in the counterparty jurisdiction) can be on the payer or payee as a corporation tax charge (though there are circumstances when that charge can be applied to an LLP).

The guidance states that hybrid & other mismatch rules are based on the OECD’s BEPS Action 2 report, but are deliberately broader in scope than the OECD’s recommendations in some areas.

For example, the rules deal with mismatches involving permanent establishments and the counteraction of mismatches where the hybrid entity is in a jurisdiction with no corporate income tax.

The updated guidance also clarifies that a permanent establishment is not a hybrid entity.

Many of the examples that were withdrawn from the December 2016 version of the guidance that was updated in March 2017, have been reinstated in this November 2017 guidance.

Point to note

The rules apply for payments or deductions made on or after 1 January 2017. There have been some changes to the rules since they were introduced, so some aspects may only apply from 13 July 2017 or 1 January 2018. The latest version of the guidance has not yet been updated for the changes included in Finance (No.2) Act 2017.

To discuss the implications of these rules for your business, or how international tax matters are dealt with in the UK, please get in touch with a member of the Mazars corporate or international tax teams.